The following discussion of our financial condition, results of operations,
liquidity, and capital resources should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
in this report as well as our Annual Report on Form 10-K for the year ended
December 31, 2019. Our third quarter represents the three-month period ended
September 30 and our first nine months represents the nine-month period ended
September 30. Unless otherwise noted, all currency amounts are stated in U.S.
dollars. The reference to a "Note" herein refers to the accompanying Notes to
Unaudited Condensed Consolidated Financial Statements contained in Item 1
"Financial Statements."
Overview
We are a geographically diversified supplier providing products, as well as
rentals and services. We operate our business through two reportable segments:
Fluids Systems, which primarily serves the oil and natural gas exploration and
production ("E&P") industry, and Mats and Integrated Services, which serves a
variety of industries, including electrical transmission & distribution, E&P,
pipeline, renewable energy, petrochemical, and construction industries.
Our operating results, particularly for the Fluids Systems segment, depend on
oil and natural gas drilling activity levels in the markets we serve and the
nature of the drilling operations (including the depth and whether the wells are
drilled vertically or horizontally), which governs the revenue potential of each
well. Drilling activity levels, in turn, depend on a variety of factors,
including oil and natural gas commodity pricing, inventory levels, product
demand, and regulatory restrictions. Oil and natural gas prices and activity are
cyclical and volatile, and this market volatility has a significant impact on
our operating results.
While our revenue potential is driven by a number of factors including those
described above, rig count data remains the most widely accepted indicator of
drilling activity. Average North American rig count data for the third quarter
and first nine months of 2020 as compared to the same periods of 2019 is as
follows:
                                           Third Quarter                 2020 vs 2019
                                       2020              2019          Count           %
           U.S. Rig Count             254                 920             (666)      (72) %
           Canada Rig Count            47                 132              (85)      (64) %
           North America Rig Count    301               1,052             (751)      (71) %

                                         First Nine Months               2020 vs 2019
                                       2020              2019          Count           %
           U.S. Rig Count             477                 984             (507)      (52) %
           Canada Rig Count            89                 132              (43)      (33) %
           North America Rig Count    566               1,116             (550)      (49) %

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Source: Baker Hughes Company
During 2019, U.S. rig count steadily declined, exiting the year at 805 active
rigs, a 26% decline from the end of 2018. During March 2020, oil prices
collapsed due to geopolitical events along with the worldwide effects of the
COVID-19 pandemic. As a result, average U.S. rig count in the second quarter of
2020 declined 50% from the first quarter of 2020 and further declined another
35% in the third quarter of 2020 from the average level in the second quarter of
2020. After reaching a low of 244 in mid-August, the U.S. rig count has since
increased to 296 as of October 30, 2020. The Canada rig count reflects both the
current weakness in oil prices as well as normal seasonality for this market,
with the highest rig count levels generally observed in the first quarter of
each year, prior to Spring break-up. We anticipate that market activity will
continue to modestly improve from current levels, although the ongoing impacts
of the COVID-19 pandemic and an uncertain economic environment that will likely
persist through the remainder of 2020 and into 2021 make the timing and pace of
recovery difficult to predict.
Outside of North America, drilling activity is generally more stable as drilling
activity in many countries is based on longer-term economic projections and
multi-year drilling programs, which tends to reduce the impact of short-term
changes in commodity prices on overall drilling activity. However, operations in
several countries in the EMEA region experienced activity disruptions and
project delays beginning in March 2020 and continuing through the third quarter
of 2020, driven by government-imposed restrictions on movements of personnel,
quarantines of staffing, and logistical limitations as a result of the COVID-19
pandemic. We currently expect these disruptions and project delays will continue
to impact international activity levels through the remainder of 2020 before
beginning to gradually recover in early 2021, although the impact from the
duration and magnitude of the ongoing health pandemic and related government
responses are very difficult to predict.
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In response to these market changes and reduced demand for our products and
services as a result of the decline in oil prices and the COVID-19 pandemic, we
initiated a number of actions late in the first quarter of 2020 and continuing
throughout 2020 aimed at conserving cash and protecting our liquidity,
including:
•The implementation of cost reduction programs, including workforce reductions,
employee furloughs, the suspension of the Company's matching contributions to
its U.S. defined contribution plan, and temporary salary reductions effective
April 1, 2020 for a significant portion of U.S. employees, including a 15% cut
to the salaries paid to executive officers (with a further 10% cut for the CEO
effective August 12, 2020) and the annual cash retainers paid to all
non-employee members of the Board of Directors;
•The initiation of additional actions to further reduce the operational
footprint of the Fluids Systems business in U.S. land, to better align our cost
structure with the lower market activity levels; and
•The elimination of all non-critical capital investments.
As part of the cost reduction programs, we have reduced our global employee base
by approximately 620 (28%) in the first nine months of 2020.
For the first nine months of 2020, we recognized $18.0 million of total charges
primarily for inventory write-downs, severance costs, fixed asset impairments,
and facility exit costs, with $17.4 million in the Fluids Systems segment and
$0.6 million in the Corporate office. The $17.4 million of Fluids Systems
charges includes $10.0 million for inventory write-downs, $3.3 million in
severance costs, $3.0 million in fixed asset impairments, and $1.1 million in
facility exit costs and other.
While we have taken certain actions to reduce our workforce and cost structure,
our business contains high levels of fixed costs, including significant facility
and personnel expenses. We continue to evaluate under-performing areas as well
as opportunities to further enable a more efficient and scalable cost structure.
In the absence of a longer-term increase in activity levels, we may incur future
charges related to further cost reduction efforts or potential asset
impairments, which may negatively impact our future results.
Segment Overview
Our Fluids Systems segment, which generated 76% of consolidated revenues for the
first nine months of 2020, provides customized drilling, completion, and
stimulation fluids solutions to E&P customers primarily in North America and
Europe, the Middle East and Africa ("EMEA"), as well as certain countries in
Asia Pacific and Latin America. International expansion, including the
penetration of international oil companies ("IOCs") and national oil companies
("NOCs"), is a key element of our Fluids Systems strategy, which has
historically helped to stabilize segment revenues while North American oil and
natural gas exploration activities have fluctuated significantly. Revenues from
IOC and NOC customers represented approximately 43% of Fluids Systems segment
revenues for the first nine months of 2020 compared to approximately 31% for the
first nine months of 2019.
In addition to our international expansion efforts, we have also expanded our
presence in the deepwater Gulf of Mexico, capitalizing on our capabilities,
infrastructure, and strong market position, as well as through product line
extensions into adjacent product offerings, including completion
fluids. Revenues for drilling and completion fluids from offshore Gulf of Mexico
increased to $37 million for the first nine months of 2020 compared to $32
million for the first nine months of 2019.
In response to the increasing market demand for cleaning products following the
COVID-19 pandemic, we began leveraging our chemical blending capacity and
technical expertise to begin producing disinfectants and industrial cleaning
products in the second quarter of 2020. After initial production start-up in the
second quarter of 2020, revenues from these products tripled in the third
quarter of 2020 to nearly $3 million. Following the third quarter 2020
installation of required packaging equipment for these products, we plan to
continue to ramp up production over the next several months.
Our Mats and Integrated Services segment, which generated 24% of consolidated
revenues for the first nine months of 2020, provides composite mat rentals
utilized for temporary worksite access, along with related site construction and
services to customers in various markets including electrical transmission &
distribution, E&P, pipeline, renewable energy, petrochemical, and construction
industries across North America and Europe. We also sell composite mats to
customers around the world.

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The expansion of our rental and service activities in utility infrastructure and other non-E&P markets remains a strategic priority for us due to the magnitude of this market growth opportunity, as well as the market's relative stability compared to E&P. The Mats and Integrated Services segment rental and service revenues from non-E&P markets was approximately $45 million for the first nine months of 2020 compared to approximately $50 million for the first nine months of 2019. Product sales revenues largely reflect sales to utility customers and other non-E&P markets, and typically fluctuate based on the timing of customer orders. Including product sales, total revenues from non-E&P markets represented approximately 66% of total segment revenues for the first nine months of 2020 compared to approximately 47% of total segment revenues for the first nine months of 2019. During the first nine months of 2020, our business was impacted by the COVID-19 pandemic, as customers delayed sales orders and project timing citing COVID-related market uncertainty, permitting delays, and logistical restrictions. As a result, we reduced our mat production levels during the third quarter of 2020 and expect to continue to do so for the remainder of the year to reduce current inventory levels, which negatively impacts our results due to the high level of fixed costs in our manufacturing operations. We currently expect that increased activity for both rental projects and product sales remains highly dependent on our customers gaining confidence in the broader economic recovery. While customer quoting activity has improved from the lull seen during the second quarter of 2020, the ongoing impact of these uncertainties, permitting delays, and logistical restrictions are difficult to predict.



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